This morning at Slate, I was greeted with the following headline: Huckabee's tax plan is brilliant. I'm not generally a fan of advocacy journalism, especially when it comes to politics, but this was especially surprising. (On a side note, I've noticed Slate trending rightward lately. I think Hitchens snuck in on the strength of his accent and since then he's been poisoning the coffee.) I thought Huckabee's plan was a national sales tax (a.k.a. "flat tax") a regressive concept that should have died with the Forbes campaign.
And it is. Huckabee's "FairTax" would replace federal income taxes with a 23% sales tax, with an exemption for those living under the poverty line. The poverty exemption makes this only slightly less regressive, considering that the poverty line for a single person in 2007 was $10,210. It's not rocket science to figure out that if you take the current graduated system and replace it with a single bracket (for those above the poverty line,) that's a tax increase for those at the bottom, and a tax cut for those at the top.
Oddly, Huckabee claims that this would actually mean lower taxes for everyone:
Expert analyses have shown that the FairTax lowers the lifetime tax burden of all of us: single or married; working or retired; rich, poor or middle class.We're left to guess who the experts in question might be. Simply lowering everyone's taxes doesn't even pass the straight-face test.
But I digress, this is not about illogical Presidential candidates. It's about illogical Slate correspondents. Here is the central argument of Landsberg's article:
With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008. (Actually, you'll pay more, of course; I'm assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings.In other words, wouldn't it be nice if we didn't have to pay tax on all the money we make from interest and capitol gains? Of course it would--if you make most of your money by having money. Landsberg is especially devious here, because he implies that you get more money (by holding onto your money longer so you can invest it) while at the same time implying that this is not a tax cut:
A sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties.)But it is a tax cut. The weasel phrase here is "equivalent of an income tax." The sales tax would be equivalent if the sales tax rate was the same as the marginal income tax rate. However the proposal is for a 23% rate when any money earned over $31,850 is already taxed at 25%, and so on up the scale. The more you make, the more you save with a sales tax.
That's not even the real deception. Huckabee is not proposing to replace the income tax with a sales tax. He's proposing to get rid of the capitol gains tax as well. When you figure that in, it's a huge benefit for those who invest their income, rather than spend it.
Some might argue that since a growing proportion of American households now own some form of stock, this would bring the middle class into the investing class. According to this report from the non-partisan Center on Budget and Policy Priorites, the top 10% of income earners hold 70% of taxable stock.
Landsberg finishes by saying that we can make this tax rate graduated (which is not what Huckabee proposes) simply by having the government monitor our every transaction.
There might be a way to design a graduated sales tax. Your credit-card providers have a pretty good idea how much you spend each year, and the government could in principle use that information to set your tax rate. Yes, there are a lot of details to be worked out, and yes, it's highly intrusive—but I'm not convinced it's any more intrusive than what we've got now.Since you're unclear, Yes, it is more intrusive. Right now the government knows how much income you're getting from certain sources. With this plan the government would know where and when you spend that money. It's not even close.
10 comments:
If you read Landsburg's article closely, he doesn't actually propose that we implement the "Fair" Tax proposal, but rather unlimited IRA contributions.
If this were the case, many of the problems you discuss actually go away. People will still be taxed progressively, but instead of based on income, it will be based on how much they spend in a particular year. If you make $50,000 and withdraw $50,000 from your IRA, your tax rate will be higher than someone who just makes $50,000.
It also would not require the government to look at every purchase to figure out how much someone is spending, as they obviously are spending their income, plus the amount withdrawn from their IRA, less the amount they put into an IRA (ignoring money stashed in your mattress).
There are two possible downsides I can see as to this. The first is that allowing people to decide when to pay taxes is just screaming for abuse. People will wait until they have a good deduction year to make a lot of large purchases to avoid paying taxes withdrawn from an IRA. People will likely also resort to loans to avoid withdrawing money from IRAs all at once.
The other problem I can see is that I'm not sure that he is correct that all of everyone's money gets spent eventually. To the extent that this is not true, it will make the tax less progressive. This could be fixed with a whopper of an estate/inheritance tax, although this too has some downsides, especially with regards to encouraging savings.
There may be a solution to the first problem though, and the second problem might not actually be a problem, I will have to further consider the issues.
Hey robert, I think titling the article "Huckabee's tax plan is brilliant" is a pretty strong endorsement of said plan. Also, he says in the article that the sales tax and the liberal IRA's are equivalent. I guess that is, without the progressive rate part.
My question for you is: what's the upside of this plan? To my mind, either it's a big tax cut for the real investor class, or you make it progressive enough that it makes no real difference.
I wonder why the club for growth has such a big problem with Huckabee.
The benefit of a sales tax/Unlimited IRA plan is that it taxes an activity that we would like to discourage rather than one that we would like to encourage. Everything else being equal, you want to set up a tax that either only discourages bad activities (think taxing cigarettes) or doesn't discourage anything (think a head tax).
By taxing income, we discourage people from being productive. People won't bother working as much overtime, or will retire earlier, or whatever, because a large part of the benefit of working that extra time is taken away in the form of taxes.
If we switch to an sales tax/IRA plan, you can make as much as you like and you get to keep every last dollar. What hurts you is when you go out and spend those dollars, at which point you are taxed on them. Therefore you are discouraged not from producing, but from consuming.
The problem with a sales tax is that everything else is not equal, namely sales taxes are very difficult to make progressive and most people generally agree that a certain amount of progressiveness in the tax code is a good thing. If you can get around this problem without incurring some other, worse cost (e.g. the government inspecting everything you spend your money on), then a sales tax is better. No one has really shown how to get around this problem yet though (this pre-bate garbage notwithstanding).
Actually, isn't it pretty easy to make such a system "progressive"?
Just send EVERYONE a check for $5000 each year.
If you spend less than $21739, you pay no net taxes. Beyond that, you pay .23 on every dollar.
For a family of four, you would have to spend about $85000 a year to pay net taxes.
I don't think that paying taxes on your income is a bigger disincentive than the incentive to earn that money in the first place.
However I agree that we should encourage savings, and I think there are a lot of things we could do in that direction, like making 401k programs available to everybody. There are already tax-free investment options, but not enough people are using them.
Maybe we should be looking at the spending side of this equation. It's way too easy for us to spend all the money we have and more. The sale of consumer credit drives a lot of corporate profits, which in turn goes to the people who make most of the capitol gains. Cynically, I would say these people don't really want the spending to stop.
We really don't need to do anything to encourage rich people to save and invest. If what we're shooting for is a better national savings rate then we should target that more directly, in a fundamentally progressive way, such that only those who need an incentive get one.
It is all a nice theoretical pipe dream. Who is going to collect the 23% from every single sale of new goods? What will be the effect on global trade? Will we the tax sale of new goods manufactured in the US that are sold overseas? Will we do it at the point of export making US goods totally uncompetitive? Will we then forbid their re-importation as used goods or become the worlds largest second hand store? Do you think an underground economy allowing tax avoidance won't spring up especially when there is no employer incentive to report wages as currently required?
This just shows Huckabee is not a serious candidate.
The so-called "Fairtax" plan has been thoroughly debunked in the following article. Main conclusions: it's not enactable, not enforceable, and clearly unfair.
http://taxprof.typepad.com/taxprof_blog/files/bartlett_fair_tax.pdf
As one of the points of greatest deception, the proposed sales tax rate is 30%, not 23%. That's the tax-inclusive rate they're quoting. Sales taxes are usually presented tax-exclusive.
Example: While you'd expect the price of a $1.00 good to rise to $1.23 after the Fairtax, it'd actually be $1.30 (23% of $1.30 is $1.00, HAHA gotcha!).
I can't believe this garbage is given any legitimacy at all. God help us if Huckabee somehow becomes president, picks up a copy of Das Kapital, and "is convinced."
I'm a 3rd year honours economics student, I also have an accounting diploma. I haven't read up on the details of the fair tax, but these are the basic arguments against it no matter how the fair tax would be structured.
1.The fair tax would be a large tax break for the rich.
There are only 2 things to do with money: spend it or save it. Income taxes tax money that is either spent or saved where as sales taxes only tax money that is spent. The rich, having the most money, tend to be the biggest savers. All this money earnt but not spent would be untaxed.
2.The Fair Tax rate would cause 'sticker shock'.
In order to generate as much revenue as is presently collected from personal income and payroll taxes, the Fair Tax would need to collect over $2 trillion. U.S GDP (total spending) in 2006 was $13 trillion. Somewhat over 67% of that spending was by consumers which translates into about $9 trillion. The Fair Tax proponents set the rate at 23% which is consistent with the numbers I've shown ($2/9). (It would actually have to be higher to encorporate the $6,000 'prebate' to every taxpayer). This huge rate would almost certainly cause a sticker shock among the public.
3.Sales taxes turn businesses into civil servants.
I'm not an expert on the U.S tax system, and I understand that some states, counties or cities already have sales taxes. However, some states do not. The estimated total number of small businesses in the United States in 2003 was 22,659,000 . Each one of these businesses would have to retool their computer systems and cash registers to collect the new Fair Tax, essentially turning them into civil servants. Depending on how the Fair Tax was set up, it would possibly make a lot of work for accountants who would ensure that the taxes collected were sent into the government.
4.It would not eliminate the IRS.
As you can see from point 3, there is still a need from the government for a large collection arm. So, the IRS would still exist. In addition to collecting the taxes, the IRS would also need to register new businesses and audit them (all 22,659,000 as of 2003) to ensure that they are sending the money in that they are collecting from consumers. Depending on how the tax was set up, the IRS job might even be more complicated.
5.Would businesses pay sales taxes on inputs?
Like I said, I'm not an expert on how the system would be set up. Businesses buy goods and services as part of their business which they turn into final goods. A sales tax either taxes businesses on the purchases of these inputs or it allows businesses to deduct these inputs from their remitances to the government. Either cause complications. If businesses can not get back the money, it makes them less competitive to foreign companies that don't have to pay these sales taxes. Already most American businesses are having a hard time competiting with places like China. If businesses can deduct the expenses, however, it makes the system more complicated and increases the work for the IRS and the businesses. For instance, a small business owner would be tempted to claim personal expenses as business expenses and put in a claim for a remitance. The IRS would need to audit this.
6.The Fair Tax would almost certainly not eliminate lobbying and claims for 'deductions'.
Fair Tax proponents say the only subsidy U.S taxpayers would receive would be a general income equal to the poverty level ($6,400 or whatever it was). It's hard to believe there wouldn't be lobbying for more. Charities would certainly get a lot of sympathy if they argued that sales tax payers should be able to send in tax receipts and receive money from back from the government equal to a percentage paid to the charity. There are many other worthy tax deductions and credits, for instance those that benefit the physically and mentally challenged. Again, it would be hard to imagine these people not receiving subsidies to equal what they presently receive in tax deductions and credits. The fair tax would not eliminate lobbying for these, it would merely shift the demand from credits and deductions to direct subsidies.
7.The Fair Tax would not eliminate tax cheating.
I gave an example earlier of a small business owner who would be tempted to claim personal expenses as business expenses so as to receive an input tax rebate. The other obvious examples of tax cheating are bartering: exchanging of one good for another, and cash payments 'under the table'. There is already an incentive for businesses to do both of these so consumers don't have to pay present sales taxes, but a 23% tax rate would add a great deal of incentive to greatly multiply these activities. Again, the U.S government would need a very active IRS to root out these practices.
8.Would the internet be taxed?
This is a much smaller point (at present), but right now there are no sales taxes collected over the internet. If that were to remain with a new Fair Tax 23% rate, it would obviously shift much spending onto the internet. So, lawmakers would have to decide how to deal with this
Huckabee promoting the a flat tax on spending is emblematic of his entire campaign: spew some bullshit that sounds good but has no real substance at all to appeal lowest-common-denominator ignorant masses. I mean, it seems simpler, so it must be better, right? God bless you.
While Michigan is technically a blue state, I most certainly reside in red-state land. What makes me insane is all the cute girls are Huckabee supporters. I hate them all :-/
Two things:
1. How exactly do you provide a sales tax exemption for poor people? "Hello, I'm poor. Don't tax me on this cheese."
Don't get me started on the privacy arguments against the author's credit card "solution" for a graded tax.
2. Speaking of credit cards, if we want to discourage bad habits, and we want to encourage production over consumption, why not just ban credit cards?
So much for small government.
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